Montreal, April 15, 2005 • No 153

  

CAPITALISM & COMMERCE

 

Dr. Edward W. Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia. He is the author of Capitalism and Commerce.
 
 

ADAM SMITH'S MORAL
AND ECONOMIC SYSTEM
 

by Edward W. Younkins

 

          Adam Smith (1723-1790), moral philosopher and economist, wrote two great books, the well-known Wealth of Nations (1776) and Theory of Moral Sentiments (1759) which has been overshadowed by his treatise on economics. Contrary to popular belief, these two works do not exist in isolation from one another and TMS is not superseded by WN. Whereas WN is concerned more directly with economic matters, TMS explains a moral system that provides a general framework for the economic domain.
 

          WN conveys a detailed understanding of why a free economy works best. In this work, Smith seeks to discover and formulate the general principles of justice and law in the economic realm. In WN, Smith addresses individuals' own advantages, self-interest, and self-love which represent one aspect of human nature. Because the commercial man of WN is, for Smith, the virtuous man in only one of his facets, he does not proceed beyond the private virtue of prudence or the limited notion of what we would call metanormative or commutative justice to go into the positive virtue of benevolence. In WN Smith made economics the study of spontaneous and unintended order which arises when voluntary exchanges among individuals produce benefits for the parties involved.

          In TMS, Smith examines the process by which individuals adopt moral standards through which they judge actions by others and themselves. This book explains how individuals can overcome the selfish impulses of the commercial realm. Recognizing that there is more to life than economics and politics and that men possess more than self-regarding sentiments, Smith discusses the phenomena of moral sentiments and sympathetic feelings among men and their desire to please others and gain their approval.

          There is a consistency in outlook and general compatibility between TMS and WN and a close relationship between Smith's moral philosophy and economics. TMS is concerned with the ordering of moral behavior and the maximization of virtue and WN is concerned with the ordering of economic behavior and the maximization of wealth as a means to a higher end. As a professor of moral philosophy at the University of Glasgow, Smith's course consisted of four parts: natural theology, ethics, justice (or jurisprudence), and political economy. His lectures on moral philosophy were the beginnings of TMS.

          There is no discontinuity between the Smith of TMS and the Smith of WN – there are not two Adam Smiths. WN fits into the moral framework of TMS. There is a logical flow from Smith's moral philosophy to his jurisprudence and political economy. Exchange is shown to occur within the moral framework of his first book. TMS provides the foundational concepts of human nature and morality upon which the ideas of WN rest. Smith's two books provide a systematic and essentially unified whole in which moral and economic ideas are coordinated and integrated. Both are integral parts of his vision of man and society. The commercial man of WN and the benevolent man of TMS are not two different men.
 

Adam Smith's Moral Theory

          Smith delineates two levels of virtues. His lower or commercial virtues are self-interested ones and include prudence, justice, industry, frugality, constancy, and so on. Another set of virtues, the primary or nobler virtues, includes benevolence, generosity, gratitude, compassion, kindness, pity, friendship, love, etc. Although there is a hierarchical relationship between these sets of virtues, Smith explains that there must also be a balance or harmony between them. In the economic sphere, self-interest allows men to operate on the lower level of virtue and yet attain the greatest benefits for society as a whole. A man need not be totally virtuous for the economic system to function to maximize wealth. The lower virtues are at the base of Smith's value theory and his determination of market prices. Smith explains that, as people get beyond the level of primitive economy to enter an advanced society and civilization, there arises the opportunity to develop higher virtues.

          According to Smith, the four principal virtues in a person's life are justice, prudence, benevolence, and self-command. It is through the exercise of self-command, Smith's cardinal virtue, that a man can rein in his selfish impulses, regulate his conduct, and indulge benevolence. Self-command involves the ability to control one's feelings, to restrain one's passion for his own interests, and to enhance his feelings for others.

          In TMS, Smith explains the evolutionary process by which the virtues and moral sentiments develop. He is concerned with what produces moral behavior in man and with how man's sentimental capacity develops. He wants to understand how we progress from having virtually no such standards as children to having widely shared standards of moral judgment as adults.

          Smith's moral theory relies heavily on the 18th century sentimentalist school of ethics comprised of empiricists who were strongly influenced by David Hume. Sentiments (also known as passions, dispositions, affections, or propensities) are feelings or emotions, and according to Smith, are the basis of moral judgment. These sentiments have been implanted in human nature by a beneficent and utilitarian deity in order to bring about the happiness and welfare of mankind. For Smith, these feelings are axiomatic and are behind a man's choices and actions. Some of these passions are selfish and some are unselfish. Like Hume, Smith considers the sentiments to be more fundamental than reason and to be what reason works on or what guides reason. The moral sentiments include approval, disapproval, gratitude, resentment, etc.

          Francis Hutcheson, moral philosopher and Smith's teacher, believed there was a "moral sense" that existed as an innate sixth sense in each man. Smith rejected the idea of a "moral sense" as too individualistic. He argued that there is no need for a special faculty of moral intuition for perceiving the general principles of natural law. He believed that moral distinctions are founded on immediate sense and feeling, but that these feelings are latent within us and develop only as we come into contact with other human beings. Sympathetic interaction was Smith's term for this socialization process. What is moral is known through original experiences and the related feelings that a person has with respect to his own actions and feelings and to the actions and imagined feelings of others. Smithian man is a social creature who acquires a moral code via experience and induction. However, this code is founded upon the innate moral sentiments that nature has given to him. These innate moral sentiments include both selfish ones and sympathetic feelings for others.
 

Mutual Sympathy and the Acquisition of Moral Standards

          According to Smith, people have an innate desire for mutual sympathy of sentiments and gain pleasure from seeing their own sentiments reflected in others. It follows that people desire mutual sympathy of sentiments with others. Smith explains that a man can engage feelings beyond himself and, through imagination, can identify with the feelings of others and can experience a fellow-feeling with them. Each person has the propensity to sympathize with others and secure by communication their predispositions and sentiments. For Smith, the basis for morality is sympathy – the ability to enter into the emotions of other people. By sympathy, Smith means harmony of any emotion ranging from compassion to pity to joy.

          Smith explains that God has endowed man with principles of nature that interest him in the welfare of others and that make their happiness necessary to him. It follows that a Smithian man is a moral person who can achieve his true nature and potentialities only in society. He is a being who requires the praise and approval of others, in addition to his own approval of himself as a virtuous man, in order to be happy.

          According to Smith, moral judgments arise only in the interaction of sympathetic actors in society. Sympathy between people is the operative faculty in determining moral propriety. People are pleased when they recognize that their sentiments correspond with those of other individuals. Each person's propensity for sympathetic interaction allows him to enter deeply into others' passions and sentiments causing him to experience like passions and inclinations. We observe others and their actions and discover what they are feeling by placing ourselves in their position. We judge their sentiments compared to what our own would have been if we were in the same situations. When we judge the propriety of an action, we are judging the appropriateness of the motives of the action to the person's situation. We imagine ourselves in another's place and imagine our emotional reaction to such a situation. We then judge the propriety or impropriety of the feelings of other people by their correspondence or disagreement with our own. We approve of another's action if it is one in which we can sympathize with the feelings that motivated the act. If we cannot so sympathize, we do not approve of it.

          Sympathy also helps people see themselves as others see them. Smith explains that we are naturally inclined to view ourselves according to how we appear to others and that we prefer an image of ourselves as just and virtuous. He states that the way in which we behave is related to how our actions and ourselves will be perceived by others. This is because people have an original desire to please others and a natural aversion to offending them. He goes on to explain that God has endowed man with the natural desire to be the proper object of love and the dread of being the deserved object of hatred. A man thus wants to be loved and worthy of love and to be praised and worthy of praise. He wants to be virtuous and not merely to be thought of as virtuous.
 

"There is no discontinuity between the Smith of Theory of Moral Sentiments and the Smith of Wealth of Nations – there are not two Adam Smiths. WN fits into the moral framework of TMS. There is a logical flow from Smith's moral philosophy to his jurisprudence and political economy."


          In addition to having the need to attain the approval of others who are judging us, Smith maintains that we have a non-selfish interest in the happiness and pleasure of others. We attempt to adjust our behavior so that they experience pleasure. To please others we must give them objects (i.e., ourselves) to observe that will promote pleasurable sentiments in them. It gives them pleasure when they can sympathize with our motives, where they can identify with the gratitude of the beneficiaries of our actions, when they can see the compatibility of our behavior with society's general rules, and when they can view our actions as a component of one grand system.

          Over time, the shared process of searching for sympathy of sentiments leads to mutually acceptable standards. This reciprocal adjustment process of correction, revision, and fine-turning results in an unintended and, for the most part, unconscious system of standards. According to Smith, the process of sympathetic interaction results in the development of the higher virtues, moral norms, and moral order. The general rules comprising such a system of morality are the result of an induction process that each person performs based on his experiences. General rules are based upon individuals' attempts to sympathize with specific actions. It is found by induction that all actions of a certain type, or circumstanced in a particular way, gain approval or disapproval.
 

The Impartial Spectator Procedure

          At this point, Smith observes a problem with his theory and adds the notion of an "impartial spectator" to deal with it. He notes that it is possible for an individual to be judged unfairly based on biased or incomplete information. The judgments of real persons as spectators are partial and biased as a result of limited knowledge of the observed person's situation or the lack of knowledge of the agent's true sentiments. Although the general rules of society that have developed serve as one corrective for partiality. Smith sees the need to introduce a further corrective in the form of the mental construct of the impartial spectator.

          Smith explains that sympathy, being rooted in human nature, is an imperfect tool and is only approximate. A person's sympathy is limited because it is impossible to truly become another. A man can never fully duplicate the feelings that he imagines exist in the other person. Impartiality involves the absence of particular personal interests. Smith explains that a person's initial assessment has to be corrected by imagining how someone more impartial than he himself would react.

          Smith states that a person sympathizes most with himself and with those who are close to him and least with those that he never sees. There is a hierarchy of attachments that runs from the most immediate (i.e., self and family) to the most distant. Although a man has the capacity for sympathy with others' feelings, this capacity is only exercised in diminishing degrees as the connection to himself becomes more and more weakened. The familiarity principles states that there is an ascending level of benevolence and a descending order of self-interest as we go from strangers, to acquaintances, to friends, and to family.

          According to Smith, people learn to adopt the viewpoint of an outside and impartial observer from which to judge their own conduct and the behavior of others. This impartial spectator, the ultimate arbiter of conduct, creates a totally unbiased perspective. Smith is thus assuming that a person is capable of stepping outside of himself in order to make an impartial assessment that considers all aspects of the situation. Smith says that a man can ask if this well-informed and unbiased spectator, with no particular relationship to any of the parties in the situation, could sympathize with the feelings motivating the various agents' actions. To decide if the impartial spectator would approve of a person's own actions, the person would have to imagine himself in the spectator's place and imagine the spectator imagining the agent's (i.e., his own) feelings and then consider whether or not this imaginary person would sympathize with, and be able to enter into, those feelings. In other words, each person attempts to judge his own conduct by imagining how a fair and impartial spectator would judge it. We might say that a man's conscience is his personal internalized impartial spectator.

          Smith's idea of an impartial spectator is ambiguous. It is unclear whether the impartial spectator epitomizes a perfect ideal or whether it symbolizes any well-informed, but impartial, observer who is not personally affected and who has the normal feelings of a typical human being. If the former is what he means, then we are dealing with a fictional selfless observer who judges from beyond the limitations of individuality, finite consciousness, and self-interest. This would be similar to Rousseau's general will or Kant's noumenal self (or will) or autonomous self-legislator. This would be problematic because the impartial observer would represent a person who judges from beyond reality!

          Smith assumes that every person has the same natural sentiments implanted in them by God or nature that call for the same moral judgments by all once partiality has been eliminated. However, there are some people who cannot form or have not formed their consciences because they have no impartial spectator. It may be that some people have not had sufficient experiences or information to develop their sympathetic feelings. Others may just become rule-followers because they lack the necessary sensibilities to feel the emotions upon which society's rules are founded. It follows that the impartial spectator guides only those who have developed their consciences. Because justice is necessary for the preservation of society, God has designed nature as a system in which people pursuing their own interests in the economic realm, without thought to others or the whole, still act in ways that benefit society. According to Smith, the propensity to exchange and the desire to better one's condition is basic to human nature.

          For Smith, the most virtuous of men govern themselves by self-command. A person can control and exercise his actions and emotions by self-command. At one level, self-command consists in a person adjusting his actions to what he imagines will enable others to sympathize with them. At a higher level, self-command means disciplining oneself to act in accordance with the virtuous dictates of the impartial spectator. Smith considers self-command to be a virtue. This is true only if a man has free will. If his idea of self-command is meant to imply free will, then, at best, it can only be an attenuated and limited form of free will because Smithian man, being a Humean slave of the passions, can only choose among the various sentiments he experiences.
 

Commercial Man and the Marketplace

          Smith contends that many men never get beyond the level of the lower or commercial virtues. They are likely to wrongly believe that goods will make them happier and, therefore, seek them for that reason. Smith explains that men's selfish desires are there for a positive and useful purpose. When individuals pursue their own private interests in the economic sphere, society will be best served. From a person's desire to seek his own advantages and improve his conditions, wealth arises and an unintended or spontaneous order results. A free economy in which people seek their own private interests is said to be lead by an "invisible hand" in directions that benefit all.

          Although Smith doubts that wealth can bring happiness, as an economist he teaches that capitalism can provide wealth. As a philosopher, however, he tells us that material possessions are not all that conducive to one's happiness. He says that men should realize that there is more to life than material well-being.

          Smith views the world, including human nature, as a machine or system designed by God to maximize human happiness. Man is a natural component of a natural telos. Teleological design is fundamental to Smith's work in which he attributes the observed order in the world to a benevolent deity. Providence has constructed external nature and man's internal sentimental predispositions as to make the universe's processes favorable to man. In fact, deception by nature is essential to Smith's Stoic system. Deception by nature leads individuals to attain what they believe are their own purposes, but which actually fulfill the purposes of the designer of the universe.

          Men are led to imagine greater pleasure from wealth than there actually is. Although individuals are misled by the deceptive appearances of wealth, this delusion can be a desirable thing. People are deceived by nature so that the economy may thrive. Although wealth does not make a man happy, the pursuit of wealth benefits society. This is the essence of Smith's attempt to explain why God created human beings with the irregularity of sentiments that frequently makes intentions and outcomes disproportionate.

          In Smith's system, the market is the aggregate of all the exchanges of the production from all the various industries and occupations. An unintended order is the outcome of all the transactions in an economy in which individuals are free to find the most profitable use of their labor or capital. Smith's conception of natural liberty is an application of natural law and natural justice doctrines to the phenomenon of exchange. Free trade requires reciprocal or commutative justice. He explains that the laws of the marketplace are the laws of an organized society. As a moralist, Smith maintains that an ethical economy is necessary to ensure the just treatment of all. A moral economic process is needed in order to develop human passions to reach a higher level of virtue and morality.

          The lower virtue of prudence guides the virtuous man in the pursuit of his own well-being. The commercial man is part of virtuous man and performs his proper function when he attends to his own happiness by pursuing fundamental goods such as property, health, and reputation. In part, he desires wealth for the approval it will attain for him in the eyes of other men who gain pleasure when they see him as successful and productive. A prudent man demonstrates self-command when he denies himself present pleasure for future pleasures that he believes will be greater. A prudent man's habits of economy, industry, attention, discretion, frugality, and application of thought are self-interested and praiseworthy. A prudent man realizes that production is good, that labor is more productive when it is more specialized, and that the more people involved in mutual exchange, the more specialized each person can be.

          Smith situated labor at the center of his economic value theory. For him, human labor was the ultimate source of value. His mistaken labor theory of value states that labor cost is a real, original, and elemental measure of value. Smith characterized labor as a good that has value for its own sake. He identified the value of an exchange in terms of the labor embodied in the goods. His erroneous value theory thus shifted economics away from the ideas of scarcity, utility, and subjective preferences and toward the notion of "natural price" based on the expenditure of labor in the production of goods. For Smith, the value of a good is inherent in the good and its exchange value depends on how much it costs to produce a good.
 

Smith's View of Nature and Science

          It is evident from a study of Smith's system that he was a deist who subscribed to a stoic worldview. As a deist, he views the creator as a benevolent but detached force in the world's order. He believed that Providence had endowed men with the propensities and capacities to make such a rationally ordered system possible. Smith's world was one of undeniable natural laws through which God guided the world. He viewed the world as a great machine the aim of which is the maximization of happiness. It follows that what is in man's nature was put there intentionally by God. As a natural religionist, Smith envisioned a system of nature designed by God in which individuals pursuing their own legitimate interests unknowingly benefit the good of all. Human strengths, weaknesses, and the system of human affections and dispositions are God-given for his own good reasons. Smith's project was to determine the natural principles which govern men's conduct. He attempted to elucidate the natural laws regulating the moral laws of men.

          It is important for us to understand how Smith views the role of science, philosophy, and theory. This can be found in his History of Astronomy. According to Smith, philosophy is a discipline that attempts to connect and regularize the data obtained from everyday experiences into a theoretical system. He says that scientists develop systems which are imaginary machines or explanations that soothe the imagination. Science is a process of finding connecting principles that satisfy our interior needs for comfort and stability. The imagination feels discomfort when it encounters disruptions in experience. Unexpected appearances and events, evidencing gaps in connections of thought, produce wonder and discomfort. Seeking to ease the disturbances caused in the imagination, thinkers develop a new theory or system that will incorporate the new appearance returning people to a sense of tranquility in their interior mental states. Smith's view of science is amazingly close to that of Thomas Kuhn who said that revolutionary paradigm changes result from discoveries brought about by encountering anomalies.

          Smith surmises that a new, more elegant system satisfies one's imagination more than the system that it replaces. He doubts that any system of thought will ever be final and incapable being improved upon. Apparently, Smith must have also viewed his own project in TMS and WN as a system that soothed the imagination with respect to economics better than other systems of thought available to individuals in his own time.
 

From Adam Smith to Ayn Rand

          Adam Smith's system is certainly flawed in comparison to Ayn Rand's Objectivism. However, Ayn Rand's insights would have been much more difficult, or even impossible, to attain if there had been no Adam Smith. Smith's grasp of partial truths in distorted ways helped lead to the Industrial Revolution and, without the Industrial Revolution, Ayn Rand would have a much tougher task to undertake. Smith identified a general body of truths that brought some conceptual clarity to the apparent chaos of the free market. He developed a set of principles that would profoundly affect the civilized world. His demonstration of the inherent stability and growth of the free-market system helped produce the Industrial Revolution which advanced people's material well-being and increased their life expectancy, which in turn, permitted individuals to establish long-range goals for their personal flourishing. It was left to Rand to formulate a more explicit and fundamentally moral, rather than economic, justification for capitalism. Her rationale was based on moral individualism, rational self-interest, rational epistemology, and reason as the paramount and fundamental means for people to associate and interact with one another.
 
 

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